Investment Options

1. Investment Options Strategies of Investing Mr. Yates

2. Categories • Now that you know why you're investing and how to get started, it's time to dig deeper and pick some investments. • As you may have noticed, there are several categories of investments, and many of those categories have thousands of choices within them. • So finding the right ones for you isn't a trivial matter.

3. For how long? • The single greatest factor, by far, in growing your long-term wealth is the rate of return you get on your investment. • There are times, though, when you may need to park your money someplace for a short time, even though you won't get very good returns. This is called the “Short Term” • Long Term are things like Stocks, Bonds, and Mutual funds

4. Short Term Options • Savings account: Often the first banking product people use, savings accounts earn a small amount in interest, so they're a little better than that dusty piggy bank on the dresser. • Money market funds: These are a specialized type of mutual fund that invest in extremely short-term bonds. • Unlike most mutual funds, shares in a money market fund are designed to be worth $1 at all times. • Money market funds usually pay better interest rates than a conventional savings account does, but you'll earn less than what you could get in certificates of deposit.

5. Short Term - Certificates of Deposit • Certificate of deposit (CD): This is a specialized deposit you make at a bank or other financial institution. • The interest rate on CDs is usually about the same as that of short- or intermediate-term bonds, depending on the duration of the CD. • Interest is paid at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest. • CDs through banks are usually insured up to $100,000.

6. Long Term Options • Bonds: Bonds come in various forms. They're known as "fixed-income" securities because the amount of income the bond generates each year is "fixed," or set, when the bond is sold. • From an investor's point of view, bonds are similar to CDs, except that the government or corporations issue them, instead of banks.

7. Long Term - Stocks • Stocks: Stocks are a way for individuals to own parts of businesses. • A share of stock represents a proportional share of ownership in a company. • As the value of the company changes, the value of the share in that company rises and falls.

8. Long Term - Mutual Funds • Mutual funds: Mutual funds are a way for investors to pool their money to buy stocks, bonds, or anything else the fund manager decides is worthwhile. • Instead of managing your money yourself, you turn over the responsibility of managing that money to a professional. • Unfortunately, the vast majority of such "professionals" tend to underperform the market indexes.

9. Last Category – Retirement Plans • A number of special plans are designed to create retirement savings, and many of these plans allow you to deposit money directly from your paycheck before taxes are taken out. • Employers occasionally will match the amount (or a percentage of that amount) you have withheld from your paycheck up to a certain percentage of your salary. (Pssssst … that's what we affectionately call "free money.")

10. Retirement Plans • Some of these plans let you withdraw money early without a penalty if you want to buy a home or pay for education. • If early withdrawals are not permitted, you may be able to borrow money from the account, or take out low-interest secured loans with your retirement savings as collateral. • Rates of return vary on these plans, depending on what you invest in, since you can invest in stocks, bonds, mutual funds, CDs, or any combination.

11. IRA • Individual retirement account (IRA): This is one of a group of plans that allow you to put some of your income into a tax-deferred retirement fund -- you won't pay taxes until you withdraw your funds. • Withdrawals are taxed at regular income-tax rates, not at the lower capital-gains rates. • All IRAs are specialized accounts (not investments) that allow the account holder to invest the money however he or she likes. • If you qualify, some or all of your IRA contribution may be tax-deductible.

12. Roth IRA • Roth IRA: This retirement account differs from the conventional IRA in that it provides no tax deduction up front on contributions. • Instead, it offers total exemption from federal taxes when you cash out to pay for retirement or a first home. • A Roth can also be used for certain other expenses, such as education or unreimbursed medical expenses, without incurring a penalty -- although any earnings that are withdrawn are subject to income taxes unless you are more than 59 ½ years old. • Not all taxpayers are eligible to contribute to a Roth IRA. - You may be able to qualify if you participate in corporate retirement plans and don't qualify for deductible contributions to the conventional IRA.

13. 400 +1, +k • 401(k): A retirement savings vehicle that employers offer. • It's named for the section of the Internal Revenue Code where it's covered. • Given the tax advantages and the possibility of corporate matching -- those cases when your employer matches part of your contribution -- the 401(k) is well worth considering.

14. 4,0,what? A who-eee? • 403(b): The nonprofit version of a 401(k) plan. • Local and state governments offer a 457 plan. • Keogh: A special type of IRA that doubles as a pension plan for a self-employed person, who can put aside significantly more than the contributions allowed for an IRA.

15. SEP Plans • Simplified Employee Pension (SEP) plan: A special kind of Keogh-individual retirement account. • SEPs were created so that small businesses could set up retirement plans that were a little easier to administer than normal pension plans are. • Both employees and the employer can contribute to a SEP.

16. Stocks • It's worth taking a closer look at stocks, because historically, they've had much better returns than bonds and other investments. • Essentially, stock lets you own a part of a business. • In return for ponying up the dough to finance the company, the investor becomes a part-owner of the company. • That ownership is represented by stock -- specialized financial "securities," or financial instruments -- that are "secured" by a claim on the assets and profits of a company.

17. Common Stock • Common stock is aptly named -- it's the most common form of stock an investor will encounter. • Common stock is more than just a piece of paper; it represents a share of ownership in a company -- a stake in a real, living, breathing business. • By owning stock -- the most amazing wealth-creation vehicle ever conceived (except for inheriting money from a relative you've never heard of) -- you are a part-owner of a business.

18. About those stocks • As with most things in life, the potential reward from owning stock in a growing business has some possible pitfalls. • Shareholders also get a full share of the risk inherent in operating the business. • If things go bad, their shares of stock may decrease in value. • They could even end up being worthless if the company goes bankrupt.